Hints For Unit 8 Assignment: Fixed Cost, Total Costs ✓ Solved

Hints For Unit 8 Assignment Fixed Cost Fc Total Costs Tc

In this assignment, you will define and calculate the remaining six major cost elements of a business, when given the Total Costs and the Quantity Produced, as well as to use the computed costs to determine a minimum cost output level for that business. In addition, you will compute both the break-even price and the shutdown price for a hypothetical business in a perfectly competitive market, determine if that business would incur an economic profit at various market prices, and if the business should continue to produce at each of those price levels.

1. What is the fixed cost for a manufacturer of LED light bulbs? Explain why.

2. Explain how to calculate the following given only the Total Costs (TC): a. Variable Cost (VC); b. Average Variable Cost (AVC); c. Average Total Cost (ATC); d. Average Fixed Cost (AFC); e. Marginal Costs.

3. Insert values into Table 3.a. for each level of output: a. Variable Cost (VC); b. Average Variable Cost (AVC); c. Average Total Cost (ATC); d. Average Fixed Cost (AFC).

4. a. What is Brenda’s break-even price for a dozen eggs? Explain. b. What is Brenda’s shut-down price for a dozen eggs? Explain. c. If the market price is $1.45 per dozen, will Brenda make an economic profit? Explain. d. Should Brenda continue producing if the market price is $1.45? e. Will she make an economic profit at 72 cents per dozen? f. Should she continue producing at 72 cents? g. Will she make an economic profit at 64 cents? h. Should she continue producing at 64 cents?

Paper For Above Instructions

In this economic analysis, we will thoroughly examine the various cost components involved in the production of LED light bulbs and the production of eggs. Understanding fixed costs, variable costs, average costs, and other cost-related concepts is essential for making informed business decisions in a perfectly competitive market.

1. Fixed Cost for LED Light Bulbs

The fixed cost (FC) of a manufacturer of LED light bulbs represents the total costs incurred when no units are produced. Based on the provided data in Table 2.a, the fixed cost can be identified as the cost associated with producing zero units of LED light bulbs. According to the table, when zero units are produced, the total cost (TC) is $4. This implies that the fixed cost for the manufacturer is $4. The fixed cost is a crucial measure because it dictates the baseline financial commitment of a business regardless of its production levels.

2. Calculating Key Cost Elements

To calculate the remaining cost components solely from the Total Costs (TC), we follow these formulas:

  • a. Variable Cost (VC): VC can be found by subtracting fixed cost (FC) from total cost (TC). Hence, VC = TC - FC.
  • b. Average Variable Cost (AVC): AVC is calculated by dividing VC by the number of units produced. AVC = VC / Quantity.
  • c. Average Total Cost (ATC): ATC is calculated by dividing total costs (TC) by the number of units produced. ATC = TC / Quantity.
  • d. Average Fixed Cost (AFC): AFC is derived by dividing fixed cost (FC) by the number of units. AFC = FC / Quantity.
  • e. Marginal Costs: Marginal Costs refer to the change in total cost when one additional unit is produced. It is found by calculating the difference in total cost for two consecutive output levels.

3. Inputting Values into Table 3.a.

In order to fill the values for Variable Cost, Average Variable Cost, Average Total Cost, and Average Fixed Cost in Table 3.a., we first need to derive these costs based on the output levels provided. For each production level (0, 10, ...), we will compute these costs as previously defined. As the production level increases, we can compute VC by tracking total cost increases and then derive the various average costs from it accordingly.

4. Brenda’s Cost Analysis for Egg Production

Brenda Smith's production of eggs raises important considerations about pricing strategies in a perfectly competitive market. To determine her break-even price and shut-down price, we use the data from Table 4.a.

  • a. Break-even price: The break-even price is achieved when total revenues equal total costs, meaning she covers both fixed and variable costs. Brenda's break-even price can be calculated from the average total cost at any output level.
  • b. Shut-down price: The shut-down price occurs when the revenue generated does not cover the variable costs. Therefore, it can be determined by finding the minimum average variable cost.
  • c. Economic profit: An economic profit for Brenda occurs if the market price exceeds her average total cost. At a market price of $1.45, we need to calculate whether her average total cost falls below this price.
  • d. Continuation of production: Whether Brenda should continue producing at a price of $1.45 depends on whether this price exceeds her average variable costs. If it does, she can cover her variable costs and contribute toward fixed costs.
  • e. Profitability at 72 cents: Similarly, determining profit at 72 cents, we ascertain whether this price covers the average total cost and variable cost.
  • f. Production decision at 72 cents: She would evaluate whether to continue production at this level based on whether price meets or exceeds average variable cost.
  • g. Profitability at 64 cents: At 64 cents, if this price does not cover the average total cost or even the variable costs, Brenda will incur a loss.
  • h. Continuation decision at 64 cents: Finally, if 64 cents falls below the average variable cost, Brenda should halt production to minimize losses.

Conclusion

In conclusion, a detailed cost analysis helps understand how various factors like fixed costs, variable costs, break-even points, and market prices are crucial for business sustainability. These calculations allow producers like Brenda to make informed decisions about their operational strategies in a competitive environment.

References

  • Economics for Managers by Paul G. Farnham
  • Cost Accounting by Charles T. Horngren
  • Microeconomics by N. Gregory Mankiw
  • Principles of Economics by Karl E. Case and Ray C. Fair
  • Managerial Economics by William F. Samuelson and Stephen G. Marks
  • Market Structure and Pricing by R.L. Pindyck and D. Rubinfield
  • Introduction to Economic Analysis by Peter J. Trupin
  • Economics for Dummies by Charles Wheelan
  • Principles of Microeconomics by Robert H. Frank and Ben S. Bernanke
  • The Theory of Price by George J. Stigler

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